Realty slowdown spooks construction companies

The going may not be as tough as in the downturn, but a lacklustre real estate market is forcing contractors to tread gingerly.

The going may not be as tough as in the downturn, but a lacklustre real estate market is forcing contractors to tread gingerly.

So some like RS Garg, chief financial officer, Ramky Infrastructure, believe it’s not a wise thing to take up real estate contracts.

“Moreover, there are a lot of new entrants bidding aggressively. You either join them or stay away. We’ve decided to stay away,” he said.

Of Ramky’s order backlog of Rs11,000 crore, only Rs500 crore is in real estate, most of them in the company’s own townships and industrial parks.

According to the data compiled by Jones Lang LaSalle (JLL) India, the realty consultant, the number of new residential units launched between January and March dropped 12% to 68,521.

“Concerns over affordability due to rapid rise in residential rates, mortgage rate hikes and a possible correction in Mumbai would mean the second quarter of 2011 will be slow on new launches,” said JLL.

The Reserve Bank of India has since March 2010 hiked the rate at which it lends to banks by 2.25 percentage points to 7.25% in a bid to stem inflation, making home loans dearer.

The central bank is expected to raise policy rates further this month during its review of the monetary policy.

JLL said launch of premium projects will also slow down, especially in Mumbai. “Nevertheless, residential activity remains firm in the southern cities of Bangalore and Chennai,” it said.

According to industry sources, no major launches have been witnessed in the commercial space as developers are now focused on finishing their existing projects.

TR Seetharaman, CFO of Chennai-based Consolidated Construction Consortium, said the company works with select developers and that too only after a project is financed.

“The developers’ clients become your clients since cash flows are generated from them and it becomes very difficult,” he said. Any blip in cash flows leads to the realty developer delaying payments to contractor.

Construction companies have consequently seen their working capital cycle stretch.

SK Sachdeva, executive director, finance, Ahluwalia Contracts India, said the company’s cycle has expanded from 45-60 days to 75-90 days.

About half of the company’s order portfolio of Rs3,400 crore is in real estate. “These delays affect our overheads and we are trying to avoid projects that don’t have assured cash flows.”

Among the dues from developers is the Rs60 crore Emaar MGF owes Ahluwalia for the Commonwealth Games Village project.
Shailesh Kanani, analyst with Angel Broking, said there are payment delays in government projects but at least it’s assured. “Infrastructure companies are trying to bring down their exposure to real estate,” he added.

Ahluwalia is one of those. “We are looking to bag Rs2,600 crore worth of orders this fiscal and we want to increase the share of government contracts,” noted Sachdeva.

Last fiscal was not impressive for infrastructure companies on order inflows.

In a June 1 report on the sector Kanani and Nitin Arora mentioned that there has been a considerable slowdown in order awarding activity across the infra sector on account of various factors like environment clearances, lack of stable leadership in various PSUs, state elections and land issues, among others.

“The only silver lining has been pick-up of awarding activity in the last couple of months from NHAI’s (National Highways Authority of India) end, although it is leading to intense competition and creating doubts over the profitability of these projects,” they wrote. Many believe the muted order booking will continue for another two quarters and possibly longer in the realty space.